Due Diligence Items

Now that you are under contract, you will need to deposit the earnest money with a title company that the Seller chooses. Some brokerages or attorneys will hold the earnest money in escrow. I always prefer that a neutral third party hold it for my clients. Even though the Seller chooses the title company, the title company is still a neutral third party. The reason the Seller chooses the title company is for the Title Insurance or Title Commitment policy. Many times the same title company that the Seller bought the property with will give them a discount for using them again. That is typically why they pick them. There are other factors in this, but we won’t be discussing them in this article. Keep in mind, a good commercial broker will be managing this process and deadlines for you. This is why they are involved, to help you get the process done in time and without losing your earnest money. If you, the Buyer, were to miss a deadline, you put your earnest money in jeopardy. Technically, by missing one of those dates or due diligence items, you can lose your earnest money. Remember, the earnest money is the amount of money you stand to lose if a deadline or due diligence item is missed. Once again, a good commercial broker will manage this for you to make sure that doesn’t happen. 

Remember, if you hired the right broker, typically, he or she will have relationships with real estate attorneys, architects, general contractors, surveyors, environmental consultants and engineers that you will need to hire to get through the due diligence items I listed earlier. All of these professionals are key in getting you to the finish line. You will incur costs for hiring these professionals to get you to the closing table. A good Buyer’s agent will know the approximate costs for each of these professional services so you can plan accordingly. Also, though you will have to pay these individuals out of pocket originally, your lender should be able to reimburse you as they tie all the costs into the loan.

As your broker goes through each of those items, he or she is crossing them off to complete your checklist to get you to the closing table. Keep in mind, if anything comes up that needs to be addressed, your broker will manage that process for you. Items like the Inspection Objection. When you hire the building or property inspector, they will visit the site and building to see if there are any issues with the property. As an example, I was part of a deal where we had the inspector come out and do the building inspection. This person removed one of the ceiling tiles and grabbed ahold of one of the support beams. I could not believe what happened next. The beam crumbled in his hands as he squeezed it. Thankfully, the listing broker and I were there to witness what happened. This turned out to be wood rot and it would end up costing $90,000 to repair. This could have killed the deal, but thankfully, we were able to renegotiate the purchase price to keep the deal alive. 

Now, some of you may say, “I could have my attorney handle that for me, as well as all the other items in the due diligence list.” Yes, that is true, however, you will have to pay your attorney hourly to handle this for you. Most real estate attorneys will range in price from $250 per hour to over $350 per hour. On the other hand, your broker doesn’t charge you as this is part of their job. Your broker only gets paid if you close on the deal. The attorney gets paid regardless of you closing the deal or not. Don’t misunderstand what I’m saying, a real estate attorney is an important part of the team, especially if you are doing a ground-up deal with a developer. Keep in mind, the attorney will be the one to review the title and the survey, as well as, the contract with the developer. Also, when the attorney reviews the title commitment and the survey, they are making sure you don’t buy a commercial property that has a cloud on the title or an issue with something on the property that should not be there. I will discuss ground-up construction deals in another article.

The Finish Line

Once all the previous items are completed, the lender will then begin the process of finalizing the paperwork for the closing. A good broker will communicate with the lender and title company and request all the documents for your review before closing. You don’t want to be sitting at the closing table reviewing documents as there can be many. Especially if you are doing an SBA loan. A typical commercial bank closing will take up to an hour. An SBA loan closing will be longer, especially if you chose to read all the documents at the closing table.

Also, make sure that you know ahead of time how much money you need to bring to closing. This amount should be on the settlement statement you receive a few days before the closing. If you have to bring money to closing, you will need to have a cashier’s check or have your bank wire the money ahead of time. After you close on the loan, you are now the proud owner of your commercial property. Congratulations!!

I can’t say this enough, make sure you hire the right broker. This individual should not cost you anything as their fees are typically paid by the Seller or the Seller’s broker. As I have discussed in other articles, the Seller hires their broker to represent them and in their listing agreement, there is a fee already in place to be paid by the Seller at closing. If the Buyer is represented, the Seller’s broker will split their fee with the Buyer’s broker. If the Buyer comes unrepresented, the Seller’s broker makes the entire fee. Regardless, in most cases, the fee is going to be paid. 

If you need assistance with leasing or buying an office, retail, or industrial space or property and want someone looking out for you, please contact me as my specialty is Tenant and Buyer Representation. The best part about my services is that they are free to you! If you would like to schedule a phone call to discuss further, please click below!

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